Twenty-four oil-producing countries, members as well as non-members of the Organization of the Petroleum Exporting Countries, OPEC, met Thursday, 25 May, and voted to extend their production reduction accord by nine months, to April 1, 2018. The extension aims to rebalance the global oil market and stabilize oil prices. Investors however, viewed the effort as inadequate as oil prices fell about 5% in the wake of that meeting. Prices since ticked upwards somewhat, perhaps in anticipation of product drawdown during the driving season beginning with the Memorial Day holidays; but Goldman Sachs just lowered its 2017 price projections for both Brent and West Texas Intermediate oil grades.

The original production reduction accord ─ which saw a spike in both oil prices and energy company stocks in its wake ─ was signed in November 2016 and was a reversal of an earlier OPEC laissezfaire production policy. While OPEC, as has been surmised, adopted that production policy in a bid to drive higher-cost (shale, oil sands, etc.) oil producers offline and garner greater market share, its implementation may have been mistimed. If the policy had been adopted before the massive investment in shale production, it would most likely have killed, or at least significantly deferred the rise of, shale oil; but shale oil, once birthed, has proved resilient.

The raison d’être for this accord extension may be that accruals from the marginal price increase would countervail losses from reduced production. But, with most of these producers dependent on oil proceeds for meeting budgetary provisions, its sustainability remains critical.Continue reading → Post ID 600

The ruinous tussle for market share between tight oil producers in North America and, in the main, members of Organization of the Petroleum Exporting Countries, OPEC, saw crude oil prices slump by more than 70% from the second quarter of 2014 to twelve-year lows in the first quarter of 2016. Prices have rebounded somewhat, driven by a production reduction accord reached on 30 November 2016. The accord which was reached by twenty-four OPEC and non-OPEC producers aimed to rebalance the oil market by reining-in the massive supply overhang.

There are indications that the accord may be having its intended effect on the oil market. With the narrowing of the spread between front month and second month for the U.S. benchmark for example, traders that had bet on contango ─ having stored oil lots bought cheaply with a bid to sell later at much higher prices ─ are finding it increasingly less profitable to keep the lots in storage. And so, from storages such as in the Gulf of Mexico and South Africa, crude oil is slowly being shipped out.

While there is a perception that global oil market rebalancing is on track, there are issues that may derail the process; and these four are informative.

Accord Compliance

The aggregate compliance rate for the first month of that production reduction accord was high, though some of the production cuts agreed under the accord represent natural production declines which would have happened with or without the accord. Non-OPEC compliance was about 50% while that of OPEC stood at about 97%. However, it is anyone’s guess if that compliance rate ─ or even any significant rate ─ can be sustained, especially where there are neither credible production records nor effective sanctions for production violations. In the case of OPEC, for example, production cuts were allotted to members based on October production figures derived from secondary sources. However, according to an analysis by PetroleumEconomist (subscription required), Iraq, which claims that her October output was at least 250,000 barrels per day (bpd) higher than the basis for her allotted value, only cut production by 109,000 bpd, about 52% of the pledged 210,000 bpd in the first month of the accord. In addition, records show that the country’s exports increased in February. Angola is also reported to have fallen short of her pledged reduction target for the month of February. Continue reading → Post ID 586

The crude oil producer-group, Organization of the Petroleum Exporting Countries, OPEC, in November 2014, adopted a laissezfaire output policy which essentially removed caps on members’ supply quotas. Driven in the main by Saudi Arabia and some Gulf producers, the policy was a thinly-veiled attempt to drive the higher-cost (mostly North American tight oil) producers offline and ensure a good share of the global oil market. On a year-on-year basis, petroleum liquids additions by North American tight oil producers rose from 44,000 barrels per day (bpd) in 2006 to a staggering 1.7 million bpd in 2014, according to a report by Rystad Energy. Though this was largely responsible for the massive global supply overhang ─ which exceeded 2.5 million bpd in 2015 ─ the response by top producers, Saudi Arabia and Russia as well as Iran and Iraq among others, unleashing their massive supply capacities, only served to exacerbate the condition. Global crude oil prices plummeted to multi–year lows. In what was loosely termed a ‘‘sheikh-versus-shale’’ duel, this bid for better market share exacted a devastating toll on the duelling spigots.

North American Tight Oil Producers

When global crude oil prices were well-above US$100 per barrel, tight oil producers in North America, which in the main, had breakeven oil prices in the US$65 – US$90 per barrel range, stayed profitable. However, when falling prices tested US$26 per barrel and even stayed low for months on end, many of these producers were forced offline, and quite a few, permanently. Data from the law firm, Haynes and Boone LLP, show that in the period from January 2015 to 14 December 2016, there were 114 bankruptcy filings in the North American upstream sector and with a total debt of more than US$74 billion. For many of the ‘‘oil-rigged’’ states and provinces, taxes on proceeds from oil and oil-related businesses formed a major proportion of revenue; for some, tax proceeds from such businesses exceeded US$5 billion in 2014.Continue reading → Post ID 560